European shares rebound on lockdown loosening hopes

If anyone were in any doubt as to the economic impact on the US economy from the coronavirus pandemic, yesterday’s economic data confirmed it in spades, as the effect of a rise in millions of jobless claims saw historic collapses in retail sales, as well manufacturing activity.

Today’s weekly jobless claims numbers will square the circle in terms of what to expect from the release of the latest April employment report which is due for release next month. In the last three weeks a total of 16.7m Americans have filed for jobless claims, with today’s numbers expected to push that number through the 20m level, with a rise of 5.5m expected, and set up a record decline in April payrolls that would surpass any historical precedent, and wipe out all of the job gains in the last 11 years.

This week, US banks have given us a foretaste of how they view the economic tsunami coming their way by setting aside over $20bn in loan loss provisions and that’s even before Bank of New York Mellon and Morgan Stanley have released their latest Q1 updates, which are due today and tomorrow respectively.

The prognosis for Asia isn’t much better with the head of the IMF in Asia predicting that the Asia region wouldn’t register any economic growth at all for the first time in 60 years. This shouldn’t be a surprise to most people and the likelihood is that we could see a decline, unless China is able to pick up the slack, as they have in previous crises.

This would seem unlikely, even if we see a rebound in the Chinese economy over the rest of the year. China relies a lot on trade for a lot of its economic prosperity, however with most of the globe on lockdown, battling a virus they are ill prepared to deal with, that seems a tall order. China is set to release its latest Q1 GDP numbers tomorrow morning, along with the latest retail sales and industrial production numbers for March.

Markets in Asia have slipped back on the back of yesterday’s darker mood, and while markets here in Europe appear to be stabilising a touch on some limited relaxation of lockdown restrictions across the region, any short term rebound in economic activity this year is likely to be akin to driving off in a car with the hand brake on, at best.

Germany has become the latest European country to say it would be loosening some measures on its lockdown over the coming weeks, which is clearly helping European sentiment for now, while reports that the UK has seen a peak in its infection rates is also helping.

In the UK the latest retail sales monitor from the British Retail Consortium made for grim reading and saw a record decline of 3.5%, as the late March lockdown wiped out the gains from the first part of the month, though food sales were a bright spot. The closure of non-food retail stores has wiped out the sector as high street footfall slid to zero.

The UK lockdown is expected to be extended later today, into the month of May, increasing the pressure further on the non-food sector, as they strive to access the governments emergency assistance scheme.

Easyjet shares have had a good start to this morning’s session after reporting a headline pre-tax loss of between £185m and £205m on first half revenues of £2.38bn. This is a significant improvement on last year’s £275m loss. The company has insisted that it has enough liquidity to endure the grounding of its fleet for at least nine months, with the delay in the purchase of 24 new aircraft helping in that regard, along with the raising of £400m of new finance.

Management declined to offer any guidance as to future expectations for this year, though they did say that bookings for winter are well ahead of the same period last year, which is probably not the reliable guide that it used to be.

The current disruption to consumer travel plans will probably see airlines having to redraw their entire business model, as more people stay at home in the short term, until some form of vaccine is found for this virus. This is likely to mean much lower annual revenues in the short to medium term until consumer confidence returns and social distancing restrictions allow.

Barratt Developments has become the latest house builder to cancel its interim dividend to preserve capital, while also postponing all new land buying, and non-essential capital expenditure. Management have also taken 20% pay cuts, waived pay rises for the remainder of the year.

In the period from the 23rd March to 12th April the company delivered 1,349 completions, which makes a total of 11,713 year to date. This number is unsurprisingly expected to slow while their sales offices are closed. The company also said it would be furloughing 85% of its staff, paying them their full pay until the end of May.

Rentokil appears to be one of those few companies that has been able to continue to operate through the coronavirus disruption, with pest control and hygiene designated an essential service by the government, though there has still been an element of disruption, in the last two weeks of March, due to lack of access to some of its contracts. Q1 revenues saw a rise of 7.2% to £630.5m.

In Italy for example, the total lockdown has seen revenues down 15.3% in March, however on Hong Kong there has been a rise of 34.5%, due to high demand for specialist hygiene services. This is likely to be a key growth area in the weeks and months ahead, as deep clean services become more mainstream. The company is still looking to conserve capital, with salary reductions for the board and senior management. CEO Andy Ransom has taken a 35% reduction in Q2 salary with the remaining 65% going into a new employee support fund.

We’ve also seen an update from Dunelm Group, one of the few retailers last year that outperformed the wider retail sector, the company closed all of its store on the 24th March, furloughing employees under the governments job retention scheme. The company has reopened its on line business and has drawn down its existing financing facilities of £175m, and has said it has enough capital to withstand store closures of up to six months.

Oil field services provider Petrofac is lower after announcing that its joint venture partner ADNOC cancelled two gas contracts worth $1.5bn in respect of the Dalma Gas Project in Abu Dhabi.

Cineworld shares are also enjoying a respite after two days of large declines on reports that Cinemark in the US could reopen in July albeit with some restrictions.

The US dollar enjoyed a positive session yesterday, solely on the basis of a flight to safety, as the US currency reaped the benefits of being the currency of last resort, on fears that the global economy is about to fall off a cliff, over the next few months.

Oil prices have remained under pressure despite the recent agreement to cut production as fears grow of even bigger demand shock, with reports that the US administration is considering paying US oil producers to keep oil in the ground, as storage capacity runs out, helping to stabilise US oil prices .

US markets look set to open higher later today ahead as we look ahead to the prospect of more big numbers in the latest weekly jobless claim numbers. The latest Philadelphia Fed manufacturing survey is also expected to show a record contraction in the same way yesterday’s Empire Fed survey and an earlier Dallas Fed survey did earlier this month.

We will also get to see the latest Q1 numbers from Bank of New York Mellon, where we could see more huge provisions in respect of credit losses. With New York being at the epicentre of the coronavirus pandemic, the numbers here could well be sobering.

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